Aaaaand the Bitcoin Bubble Is Deflating

Robocoin CEO Jordan Kelly, places the company’s decal on the Robocoin machine, the world’s first bitcoin kiosk (ATM) for buying and selling popular and controversial digital currency, before a demonstration on Capitol Hill in Washington, Tuesday, April 8, 2014.

I’VE been saying for some time now that Bitcoin is a bubble. And we’re seeing the usual and classic bubble behaviour in its price too. It’s down to just under $400 today:

Bitcoin reached another milestone today, with the cryptocurrency falling below the $400 per-coin mark. Bitcoin sold for over $1,100 inside of the last 52 weeks.

What goes up like a rocket does usually come tumbling back down to Earth.

And economists do have a rough rule of thumb about when something is in a bubble. That’s when people buy and hold it simply because they think it will be worth more tomorrow. That they do this is what makes it worth more tomorrow and thus that price keeps rising.

You can have price rises without this happening, of course: for example, a share might rise in price because the company is making higher profits. This means more income to that share over time and thus it’s worth more. The bubble part is when it’s only about the rising value: not about greater income that can come from whatever it is compared to alternative investments.

Do note that Bitcoin being in a bubble or not has nothing at all to do with whether it is going to be successful in the long term. Indeed, we can find economists who will tell us that bubbles are almost a requirement of a successful new technology. Because it’s exactly those startling price rises that get people to pay attention and then commit capital to the surrounding infrastructure necessary. And there have been commitments to Bitcoin, certainly tens of millions, probably more like a couple of hundred million, of capital to build more secure trading sites, wallets and all of that.

So it’s entirely possible that Bitcoin will become part of the general economy over time. Calling it a bubble is simply referring to that price boom: the one that’s now slowly deflating.